Friday, July 13, 2007

Black Day for Arrogant Entrepreneurs (and all who benefit from what they create)

The popular wisdom is that Conrad Back is an arrogant man who must be guilty because he shows contempt for ordinary people, their regulated lives and their (arrogant) envies, and has an evident passion for power, wealth, and above all, status. This only begs the question of what is he guilty, if the kind of media business he made possible was only possible with such a man at its head, something the various grey-suited investment funds who now portray themselves as Black's victims must surely have known when they first bedded him. Is the world and its conflicts really very often reducible to clear-cut victims and victimizers, or does application of the postmodern scapegoating logic only create its own further losers? Nothing has done more to ruin investments in Black business than has Black's prosecution, raising the legitimate doubt that protection of shareholders, and not marketplace resentment, is at the heart of the matter. Protecting shareholders is not, admittedly, synonymous with upholding the law, but should we prosecute people when doubts about the existence of obvious victims is better mediated by civil litigation?

At first, Black's investors, largely anonymous corporate players, needed such a man, good at trading horses (though only good as long as he didn't have to wear and live the life of a grey flannel suit); but when they felt he crossed them, probably slept around, and wrangled more from their partnership than they thought he deserved, breaking or bending the rules of the horse track along the way, they found they could bring him down, with the help of the bureaucratic elite's favourite criminal prosecutor, Patrick Fitzgerald. But it turns out, somewhat like Scooter Libby, Black was really brought down, for obstruction of justice, by his apparent ass-covering actions after the prosecutorial process had commenced. Is he the business equivalent of an adulterer being criminally charged for beating his wife? More thoughts below on whether American justice is taking lessons from the Chinese Communist party.

The trial by attrition of Conrad Black has exposed the dark underbelly of the legal system, where the government can ruin a man, take his property, his means of livelihood, and make him a social pariah – all without the hassle of securing a conviction. There is an insidious little worm that has crept into the legal system, an iconoclastic mentality that is distorting the rule of law. Focused less on securing justice than on bringing down the high and mighty, all the while pandering to the politics of envy, it affects the entire system of corporate governance.

This is highlighted by four developments in the law of corporate governance: the concentration of power in the hands of minority shareholders, the criminalization of technical regulatory violations, the abandonment of the rule of law in favor of aggressive prosecutorial tactics, and the entrenchment of a culture that penalizes success.[...]In 2003, just as his legal troubles were beginning, Black published a laudatory biography of Franklin Delano Roosevelt. In it, Black acknowledged that the New Deal probably prolonged the Great Depression, but countered that it preserved the credibility of the market economy at a time when unemployment was more than 30% and there was a genuine crisis of capitalism. There is a certain cruel irony in Black's praise of the New Deal, because there is a direct line from the New Deal to Black's current woes.

The New Deal's creation of the regulatory state – where Congress delegated much of its law-making power to specialist executive agencies – has through the effluxion of time resulted in regulatory agencies making the rules, defining their scope and, in some cases, actually enforcing them. Conrad Black, whatever his views on the New Deal’s golden legacy, is today in the crosshairs of its golden shower: what would previously have been civil wrongs punished by a fine are now criminal offenses, and Black is a latter-day Joseph K.

For example, Black's decision to turn down a salary increase (which is taxable as income) and instead accept the payment of management and non-compete fees (which are, if arranged competently, not taxable as income) resulted in tax evasion charges being filed against him, as well as serious criminal charges for violating corporate securities laws. That is to say, a technical, and probably innocent, tax and disclosure violation suddenly became a Very Big Deal. Through the New Deal's looking glass, regulatory violations receive a similar punishment as serious crimes.

Some have argued that not punishing corporate criminals undermines faith in global capitalism; well, so do windfall profits, CEOs earning seven figure salaries, and high gasoline prices – yet we do not criminalize these things. Corporate crime, frankly, is often a matter of question begging, that is to say, the criminalization of things which ought not to have been crimes in the first place. There are many criticisms one can level at someone who manages his affairs to minimize tax liability and in the process neglects the fiduciary duties he owes to his company, but calling these actions criminal, and seeking to punish them with jail-time, is a massive overreaction. A good rule of thumb is that unless a CEO's conduct falls within traditional concepts of “fraud”, “embezzlement”, “larceny”, and so on, we should proceed with caution when creating new and vague criminal offenses.[...]Much of Black's troubles stem from the fact that he and his wife led a lavish lifestyle. Reading through the Hollinger reports that fault him for corporate mismanagement, this seems to be the source of most of the anger directed his way. However, this grievance is based on a fundamental misunderstanding of what the Hollinger brand used to be. As David Asper, Vice-President of CanWest Global Communications Corp, once explained: “If Lord Black ever decided to sell his interest in Hollinger, it is he – and not Hollinger – with which we did not wish to compete.” Hollinger was merely a means for Conrad Black to exert influence over his newspapers – replacing staff, changing the editorial slant, and improving the overall quality of the writing and reporting.

This is why maintaining Black's public persona was so important: he harkened back to the good old days of grand newspaper proprietors, family dynasties, and concern for the value of the brand rather than vulgar things like day-to-day movements in share prices. In most publicly traded companies, there is no correlation between the success of the company and the extravagance of the chief executive. I do not know who the CEO of Lucent Technologies is, and even if I did, it would not bother me one way or another whether he liked Paganini or knew that Josh Bell could not play in tune on the violin.

Hollinger, by contrast, was more like Donald Trump's corporate empire. Success depended on the image it projected and the status of its chairman. It is precisely because Donald Trump maintains a lavish lifestyle, keeps an absurd coiffe, and has a wife that looks like the arm candy every sexless beta male lusts after, that Trump condominiums sell at a premium. Likewise with Conrad Black, that grand but somewhat dandyish social climber. Paul Fussell, author of Class: A Guide Through the American Status System, would have said that Black’s futile attempt to be “upper class out of sight” spoke to the deepest longings and insecurities of the middle class. The Hollinger brand was built around Black’s persona, which may be why, with Black no longer at the helm, it is nothing more than a holding company for a variety of underperforming newspapers.

It does not take a devotee of Ayn Rand's doorstop screeds to appreciate the dangers of punishing the creative entrepreneurial class in a company built around their success. In fact, as Rand would have predicted, nearly all ex-Hollinger publications have experienced some sort of decline, whether in quality or in circulation, since Black left the newspaper business.

It is too easy to liken Conrad Black to Ken Lay and Hollinger to Enron. However seductive, this comparison should be resisted. The Enron fraud resulted in a massive loss of shareholder wealth and the financial ruin of many families, and it was caused by a deliberate attempt to misreport financial statements to perpetrate a fraud. The Hollinger affair, by contrast, has resulted in no shareholder bankruptcies, was not based on a fraud about the company's financial health, and has only impoverished its former chairman. Like mistaking a donnybrook for a pogrom, we lose our sense of proportion when we compare Hollinger to Enron.

Black's mistake was that he ran Hollinger as if he owned it when, in fact, he only owned a controlling stake. Black ignored the fact that shareholders and directors owe special legal and equitable duties to one another, as well as to the company. But this mistake is not criminal, and it does not justify the punitive lawsuits being filed against him, the pre-trial seizure of his assets, or the damage being done to his reputation.

There will be recriminations a-plenty over what was just announced on the 12th floor in Chicago. Conrad Black was found NOT GUILTY of racketeering, NOT GUILTY of tax fraud, NOT GUILTY of the CanWest scheme, NOT GUILTY on Bora Bora, the Park Avenue apartment and Barbara's birthday party, NOT GUILTY on the individual non-competes on US newspaper sales.

He has been found GUILTY in just two narrow areas - "obstruction of justice" re the security camera footage of him removing boxes from 10 Toronto Street, and three "mail fraud" counts relating to the APC non-compete agreement, in which (as the government argued) Black and Radler paid Black and Radler not to compete with Black and Radler. As I argued here and here, those were always the easiest charges to shoot for if you wanted to convict on something. It speaks very poorly for Black's legal representation that the best argument against the APC charges was made by David Radler and the best argument against the obstruction count was made to me over a cup of tea by Barbara Amiel.

The government alleged three schemes - the "US scheme", the "CanWest scheme", the "perks scheme" - and upgraded them to racketeering, and threw in tax fraud. They lost on racketeering and tax. They lost outright on two-thirds of the schemes. And on the remaining scheme - the "US scheme" - they lost on everything but the APC non-compete fee. Yet, absent successful appeals, four men could be spending the rest of their working lives in jail. The US Attorney's office might usefully adopt as its motto the IRA's message to Mrs Thatcher after the Brighton bombing, "You have to be lucky every time. We only have to be lucky once."